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Mr. Djanogly: At a time when many, if not most, option holders have been saying that their options are going underwater and that their participation in the equity of their company is being wrecked, why do the Government feel that now is the time to start cracking down even further on such schemes? With 600,000 jobs

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lost, tough times and low productivity in the manufacturing sector, is not this the time to encourage share participation and involvement by employees? To that end, why does not the clause, rather than punishing people through tax, increase the use of approved schemes by, for instance, raising the limit of £30,000 to £100,000?

Dawn Primarolo: First, I want to remind hon. Members of the huge amount of taxpayers' money that we commit to supporting share ownership. Combined tax and national insurance means that the figure is rising to just under £1 billion a year, involving approximately 2.5 million employees. That figure is also rising.

The hon. Member for Arundel and South Downs (Mr. Flight) is right to extol the virtues of approved employee share ownership schemes in their varying guises in not only rewarding employees but giving them a stake in their company. That leads to the associated benefits in productivity and staff commitment. He will also know that many views exist about the administration of such schemes. As David Cohen, head of employee incentives at Norton Rose, explained recently in an article on the proposals for employee share schemes:

he phrases it delicately—

That has happened not recently, but over time. He continues:

in a way that is proper. He points out that often, taxpayers are motivated to do exactly what the Inland Revenue is trying to minimise.

It has always been a Government objective and, I presume, a goal of the previous Government, to try to ensure that the patchwork of rules and regulations that have built up over the years should be as clear and simple as possible, given that the subject is already complex.

Let me deal briefly with consultation. Over several years, the Inland Revenue has been in extensive dialogue with the representative bodies, especially those that are most concerned with employee share ownership schemes. Many comments have been made over that period about desired changes to legislation. The Inland Revenue drew on those dialogues and representations in drafting the changes that are incorporated in the Bill. I recommend the article by David Cohen in this week's "Tax Journal", which clearly sets out the main principles that needed to be tackled and would be helpful to the scheme. I am eternally grateful that they bear a startling, almost identical resemblance to the Government's actions. Dialogue and consultation have therefore been going on for some time.

Consultation does not always guarantee that there will no subsequent changes. The hon. Member for Arundel and South Downs referred to that. Sometimes representative bodies recommend actions about which they might not have consulted extensively in their organisations. They might subsequently find that they do not quite fit. I will deal with that and the changes that the Government might make later.

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The clause introduces several changes to employee share schemes to make them simpler and more flexible, with the caveat that they are not necessarily straightforward in the first place.

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The provision is focused on the tax and national insurance advantage of approved share schemes. The Government remain committed to employee share schemes as an important means of increasing productivity. We acknowledge the positive effects of staff motivation. For example, a large proportion of the FTSE 100 companies have some sort of approved scheme. More than 850 companies granted more than 4,500 options under the enterprise management initiative in 2001–02. Executive management incentive—EMI—was introduced for the smallest and newest companies to help them to recruit and reward the high-calibre staff that they need in order to grow.

Even during the current low in the stock market, companies have continued to introduce and develop their employee share schemes because they are a long-term investment. They are intended not to provide short-term gain but to give employees a long-term interest in the success of the company for which they work.

The changes that clause 138 introduces are only the latest in a series of improvements that we have continued to make to employee share schemes. Other provisions introduce the statutory corporation tax deduction for companies that offer employee share schemes. Last year, we worked closely with my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on the Employee Share Schemes Bill to introduce some positive changes, which would encourage share incentive plans.

The changes in this Bill will affect all the improved employee share schemes. We are proposing a key change to share incentive plans—SIPs. The SIPs scheme is one of the two newest schemes, which the Finance Act 2000 introduced. It was designed after extensive consultation and it is intended to fulfil the needs of all companies. It offers them flexible methods of achieving employee share ownership, with tax advantages for employees and the companies that employ them. As the hon. Member for Arundel and South Downs acknowledged, SIPs have been widely welcomed. To date, some 750 companies have applied for Inland Revenue approval of their plans and more than 500 have been implemented or are ready for implementation. We have listened over time to the share scheme industry's ideas on ways to improve the administration of the schemes.

The changes in the Bill to ease administration for employers respond to industry requests. They have been generally welcomed but the industry has expressed anxiety about the proposed change to the rules for dividend shares. Although the change achieves the simplification for which the industry asked, it appears that those who requested it did not establish its full impact with scheme administrators. Feedback from the

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industry suggests that it would prefer to retain the existing rules. So, since the Government listen to business—

Mr. George Osborne: That was said with feeling.

Dawn Primarolo: Perhaps we should not have listened in the first place. I shall table amendments in Standing Committee to withdraw the new proposals, in line with the industry's request.

The package also includes changes to modernise the older approved schemes—save-as-you-earn and the company share option plan—that were developed in a more regulated climate. The provisions align the company share option plans and the save-as-you-earn rules with those of a SIP when possible and appropriate, to help reduce administration of the schemes.

Clause 138 also introduces changes to extend the application of pay-as-you-earn to any income tax due after early exercise of a company share option plan. That is not a new tax charge. Early exercise in three years of grant of a company share option plan option currently attracts a tax liability but it is collected through self-assessment and does not attract national insurance. Unfortunately, we have become aware of evidence that company share option plans are being granted and exercised within three years solely to avoid national insurance, and not for any sound commercial reasons. That is not fair on the majority of employees who pay their national insurance contributions, nor is it in line with the objective of encouraging employees to take a long-term stake in the success of their company.

Mr. Burnett: Will the Paymaster General address a more hazardous aspect of this issue—namely, the possible penalty on the declining value of the shares?

Dawn Primarolo: An initial problem that we need to address with regard to avoidance is when options are given for shares for 100 years' time, for instance, and the value is rather difficult to quantify. The tax charge is then levied and the benefit year is reassigned—and, lo and behold, it is within three years. There were some difficulties in regard to that, and I appreciate the point that the hon. Gentleman raises, but this is always a challenge. How can I put this delicately? If a set of rules is to operate fairly for everybody, everybody has to use those rules fairly. When some do not, they can spoil it for others.

Mr. Bercow: Will the right hon. Lady give way?

Dawn Primarolo: I would like to make some progress, but I will be happy to give way to the hon. Gentleman later.

The change in the Bill will treat company share option plans exercised early in the same way as any other unapproved option. That will not only help to encourage employees to hold their options for three years to qualify for tax and national insurance relief but make collecting tax through the PAYE system simpler for the employee. We recognise that there are some difficult circumstances in which people have no choice but to exercise their options early. Other company share option plan changes that are being introduced as part of

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this package will ensure that employees who exercise options within three years of grant because of injury, disability, redundancy or retirement, for example, will be able to do so tax and national insurance-free. That recognises the hard choices that people sometimes face in their employment. We are trying specifically to deal with that issue here.

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